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Bill Schmick: Close to another interim market top

Off The Charts-Job Market

Traders work on the floor at the New York Stock Exchange in New York. Columnist Bill Schmick writes that investors have had a good run in the last few months as markets tick higher, but shouldn't get greedy.

Investors have had a good run in less than two months, as the S&P 500 Index has regained 10 percent from its June 2022 lows. The tech-heavy NSDAQ has done even better than that. It is time to ask how much higher can the equity markets climb?

There is a Wall Street truism that I like to remind readers at times like this: “Bulls make money, Bears make money, Pigs get slaughtered.” In other words, don’t get greedy.

Just about every variable I look at tells me it is almost time for a pullback in the equity markets. Technical charts, fundamentals, political and Fed speak tells me that the bear market rally we have been enjoying is going to roll over soon. We are very far away from what we could consider normal in today’s markets.

Prices are stretched like a rubber band and understanding why may give you some insight on why I am expecting a pullback. The bulls are saying that we have entered a "new normal.” The litany of reasons, including inflation, have peaked; a mild recession may or may not happen; the Fed is on the verge of pivoting to an easier money policy; and prices and the price/earnings ratios have fallen far enough. In other words, “the lows are in.”

I guess I’m a "show me" type of guy. Take the Fed’s stance, for example: After last week’s FOMC meeting, investors heard something I didn’t from Chairman Jerome Powell. I did not hear any relaxation of the central bank’s hawkish message — many claim that they did.

Since then, several FOMC members have warned that nothing has changed, which bolsters my belief that we will continue to see additional tightening throughout the rest of the year. Even if inflation has peaked, that only means to me that inflation may not climb higher. It doesn’t mean it will fall quickly. Valuation-wise, the relief rally has already pushed up price levels and P/E ratios, while, at the same time, earnings have fallen.

There are some positive changes that could alleviate some of the inflationary pressures. The U.S. dollar has been falling from historical highs. That is good for U.S. exports and reduces the hit to corporate earnings for many of our multinational corporations. Energy prices have also fallen with West Texas Intermediate (WTI) oil now trading under $90 a barrel. Gasoline prices have fallen by over a buck a gallon. And despite the war, Ukraine and Russia are beginning to export grains again after six months of abstinence.

Clearly, if these trends persist, the rate of inflation may well have peaked, and with it the pressure to raise rates higher and longer by the Fed may become a reality at some point in the future. My bet is that it won’t happen now. The Fed will continue its course until that time when it can safely believe these trends are here to stay.

The latest monthly jobs report shocked most economists. The U.S. gained 528,000 jobs, far more than most expected. The unemployment rate fell to 3.5 percent. That was a sharp jump from the 398,000 job gains in June. To me, those strong labor gains will keep the Fed on course to continue the tightening program that is now underway.

My target for the S&P 500 on this bounce is around 4,200, give or take a few points. This week, the index reached 4,167 before falling back. Next week, depending on the data, we could see my target hit. After that, we could easily see a 5-7 percent decline that could take the S&P 500 Index down to the 3,900 level.

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